The Power of the Customer in Banking

We tend to think of banks as enormous monolithic institutions against which customers may bang their heads in frustration — but forget about enacting any real change. And anyone who has ever spent an interminable amount of time waiting on hold for a customer service representative who will fail to explain the surprise fee on your account and refuse to waive it could be forgiven for thinking the little guy will never make a difference.

However, that familiar narrative of uncaring banking Goliath vs. powerless customer David got a pleasant shock in November 2011. That was when Bank of America backed down from their proposed $5 monthly fee for debit card usage. Their reason for canceling the proposed fee? Incredible customer backlash that included everything from a 300,000-signature petition to tens of thousands of Bank of America customers threatening to leave the bank. (See also: Why I Like Big Banks)

Apparently, the little guy has more power than we thought.

Banking is just like any other retail business — they need to keep their customers happy. In banking, the CEOs may be accountable to their shareholders, but they depend upon their customers to stay in business.

This means that customers have power in the face of unanticipated changes in the banking industry. Here is what you need to know about how banks make their unpopular decisions, and what we, as customers, can do about it.

The Straight Economic Model

For the most part, banks are pretty unsubtle and straightforward institutions. If they see that they will be losing revenue in one area, they will try to make up for it elsewhere.

This is what happened with Bank of America in 2011: The Durbin Amendment to the Dodd-Frank Act was placing limits on the amount that banks could charge retailers each time a debit, credit, or gift card is used. That fee — familiarly known as the swipe fee — had previously been unregulated, but the Durbin Amendment placed caps on the amount that retailers will have to pay for each swipe.

While these swipe fees are nominally instituted to pay for fraud protection and transactional costs, they have been an enormous income generator for banks. Bank of America in particular was bringing in $3 billion per year in profit from swipe fees. When the Durbin Amendment went into effect, the bank’s top brass wanted to find a way to make up for their lost income — hence the proposed $5 per month debit card usage fee. It was simply a straight economic decision — replace lost income with a small fee, spread out over every cardholder.

Of course, we all know what happened next. The idea of consumers suddenly having to pay a fee to use their card was infuriating — to the point where consumers decided to switch banks, publicly decry Bank of America, and basically make it clear that the company would lose more money by implementing this fee than they would lose by dropping it.

What happened was a failure on the part of Bank of America to understand behavioral economics — where money and emotion intersect. By looking at everything as a straight financial decision, they shot themselves in the foot. Dr. Dennis Jacobe, the Chief Economist for Gallup, put it this way — “unfortunately, this finance-focused approach to replacing the bank's lost revenue ignored some of the basic tenets of behavioral economics. From a behavioral economics perspective, one of the worst things a company can do is to begin charging a new fee for a service that had previously been free.”

The Price-Leader Strategy

The other big mistake Bank of America made was in employing the price-leader strategy when introducing this fee. This is a tactic wherein one major player in an industry changes a price or announces a new fee, and the rest of the industry simply follows suit.

This tactic can work very well. For instance, the airline industry often uses it. One airline will announce that it will be charging for checked bags, and suddenly every airline is charging for them. Customers grumble and pay the new fees, because it’s almost impossible to switch to a different airline and avoid them.

However, in the case of Bank of America’s monthly fee, other banks were not necessarily willing to jump on that train. Part of the reason for this had to do with the atmosphere of distrust toward banks in fall of 2011 — this was, after all, just about the same time the Occupy Wall Street movement started gaining traction.

As a result, Bank of America found themselves in the position of pricing themselves out of competition, and they quickly had to back down.

The Power of the Customer

When it comes down to it, customers ultimately have the power to decide if they will play by the rules the banks are setting. The Bank of America fee debacle was hardly the first time that customers just said no to a proposed fee change. In the mid-90s, banks tried to charge customers for teller transactions, hoping to entice them to use ATMs and the new-at-the-time online banking opportunities, thereby reducing overhead costs. Customers were horrified at the proposed fees and made it clear they would not stand for it. The banks that prospered were the ones that repackaged their products and found ways to offer discounts for not using tellers, rather than fees for using them.

In that case, as in the situation with Bank of America, customers voted with their feet. Their disgust at the proposed changes made it worthwhile to change banks. Making unpopular fee decisions literally cost the banks money in lost customers.

However, it’s not enough for banks to keep their customers through apathy or lack of other choices. Banks have also found that keeping customers happy and engaged is an important part of growth. According to Dr. Jacobe, “Customers become engaged only when four emotional needs are met: they feel pride and passion for the brand they bank with, they believe the bank has integrity, and they're confident they'll always be treated well and fairly. It's financially imperative that banks provoke this response. Fully engaged retail banking customers are much more likely to say they intend to open a new account or take out a new loan.”

And since customer satisfaction is so important to the growth of banks, judicious use of complaints is one of the biggest weapons in the customer’s arsenal. Making it clear to your bank that you are unhappy with their service can potentially bring about change — or at the very least, prepare your bank for your imminent departure.

The Bottom Line

It may feel as though the big banks hold all the cards, but we all need to remember that they really do need us more than we need them — as it is theoretically possible to keep your life savings in your mattress, while they simply cannot operate without customers.

Banks may have always followed the straight finance approach to keeping their revenues high, but they are beholden to their customers. When that straightforward approach ticks off their customers, they will need to find new methods, or else risk losing their most important asset — us.